Tuesday, July 15, 2014

U.S. Stands to Lose Billions From Corporate Tax Inversions - One Estimate Puts Lost Tax Revenue at Close to $20 Billion Over a Decade

How much revenue does the U.S. Treasury stand to lose from corporate tax inversions? It is difficult to say precisely, but one estimate puts the figure at close to $20 billion.

A nonpartisan congressional research panel said the U.S. would receive an additional $19.46 billion over a decade if most new tax inversions were essentially halted with proposed changes to the tax code. The estimate, by researchers at the Joint Commission on Taxation, is based on estimates from previous inversions, in which U.S. companies make overseas acquisitions to gain tax advantages, and doesn't take into account deals being made now, including Mylan Inc.r ValueYour ChangeShort position 's $5.3 billion stock purchase of Abbott Laboratoriesoverseas generic-drug business.

Calculating how much the U.S. Treasury would lose is nearly impossible because of a dearth of reliable tax data from companies' public filings and the variables in how companies can structure their businesses, tax experts say.

One way companies seek to reduce their U.S. tax bills by reincorporating overseas is to transfer pretax income from their U.S. operations to their foreign parent companies through intercompany debt, says corporate tax consultant Robert Willens.

But it is difficult to know how large of an impact that will have for a given company because of limits on how much interest companies can deduct from their taxable income. There is also a risk that companies act too aggressively attract scrutiny from the Internal Revenue Service.

Another variable is the cash many companies keep overseas to avoid U.S. taxes. The cash only becomes taxable once it is brought back to the U.S. to pay dividends to shareholders or is used for other purposes. But companies don't always disclose how much cash they bring back home or when. Some companies say they were never going to repatriate the cash anyway, so they aren't depriving the U.S. tax base of revenue by moving out of the country.

Then there is the simple difficulty of knowing how much companies pay in taxes. The effective tax rates that companies disclose in their regulatory filings give a rough approximation but may not include certain variables, including tax benefits the companies receive when employees exercise stock options, Mr. Willens says. Companies are also often engaged in tax disputes with governments where they operate that can take years to be settled and make their effective tax rates swing widely from year to year.